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1. Suppose you are an analyst with the following data: rRF = 5.5%; rM - rRF = 6%;
b = 0.8; D1 = $1.00; P0 = $25.00; g = 6%; rd = firms bond yield = 6.5%. What is
this firms cost of equity using the CAPM, and DCF methods.
CAPM = rRF + b (rM rRF)
CAPM = 5.5 + (0.8) (6)
CAPM = 10.3%
2. A firm has common stock with D1 = $1.50; P0 = $30; g = 5%; and F = 4%. If the
firm must issue new stock, what is its cost of issuing new external equity?
(10.21%)
Re = [D1/Po (1-F)] + g
Re = [1.50/ 30 (1-.04)] + 0.05
Re = 10.21%
3. A firm has the following data: Target capital structure of 46 percent debt, 3
percent preferred, and 51 percent common equity; Tax rate = 40%; rd = 7%; rp =
7.5%; and rs = 11.5%. Assume the firm will not be issuing new stock. What is this
firms WACC?
WACC = (wd)(rd)(1 T) + (wc)(rc) + (wp)(rp)
WACC = (.46) (.07) (1-.40) + (.51) (.115) + (.03) (.075)
WACC = 0.01932 + 0.05865 + 0.00225
WACC = 0.08022 = 8%
4. Percy Motors has a target capital structure of 40 percent debt and 60 percent
equity. The yield to maturity on the companys outstanding bonds is 9 percent,
and the companys tax rate is 40 percent. Percys CFO has calculated the
companys WACC as 9.96 percent. What is the companys cost of common
equity?
A. 11%
B. 12%
C. 13%
D. 14%
40% Debt; 60% Common equity; rd = 9%; T = 40%; WACC = 9.96%; rs
=?
WACC = (wd)(rd)(1 T) + (wc)(rs)
0.0996 = (0.4)(0.09)(1 0.4) + (0.6)rs
0.0996 = 0.0216 + 0.6rs
0.078 = 0.6rs
rs = 13%.
5. Hook Industries has a capital structure that consists solely of debt and common
equity. The company can issue debt at 11 percent. Its stock currently pays a $2
dividend per share and the stocks price is currently $24.75. The companys
dividend is expected to grow at a constant rate of 7 percent per year; its tax rate is
35 percent; and the company estimates that its WACC is 13.95 percent. What
percentage of the companys capital structure consists of debt financing?
A. 16%
B. 18%
C. 20%
D. 22%
rs = D1/P0 + g = $2(1.07)/$24.75 + 7%
= 8.65% + 7% = 15.65%.
WACC = wd(rd)(1 T) + wc(rs); wc = 1 wd.
13.95% = wd(11%)(1 0.35) + (1 wd)(15.65%)
0.1395 = 0.0715wd + 0.1565 0.1565wd
-0.017 = -0.085wd
wd = 0.20 = 20%.
6. Project K has a cost of $52,125, its expected net cash inflows are $12,000 per year
for 8 years, and its cost of capital is 12 percent. What is the projects NPV?
A. $7,486.68*
B. $7,753.78
C. $8,368.46
D. $8,621.88
8. Your rich aunt wants to retire in 20 years but is unsure of how much to invest now
so that she can have $2,000,000 as a retirement fund. She is currently looking into
markets that yield 8%. Calculate how much she should invest now.
N = 20, I/Y = 8, PV = -429,096, PMT = 0, FV = 2,000,000
10. Pearson Brothers recently reported an EBITDA of $8.5 million and $1.9 million
of net income. The company has $2.5 million of interest expense and the
corporate tax rate is 40%. What was the companys depreciation and amortization
expense?
A. $3,166,667
B. $2,833,333 *
C. $1,833,333
D. $1,266,667
EBITDA 8,500,000
DA 2,833,333
EBIT 5,666,667
I 2,500,000
EBT 3,166,667
Taxes 1,266,667
NI 1,900,000